In our earlier post, we discussed the Office of the Superintendent of Financial Institutions’ (OSFI) newly proposed measures intended to support federally regulated financial institutions and improve the stability of the Canadian economy and financial system in the face of challenges posed by the COVID-19 pandemic. OSFI has recently published additional announcements for sector-specific measures to support federally regulated deposit taking institutions (DTIs), insurers, and private pension plans. These measures are detailed below.

Measures for DTIs

OSFI has announced a suite of adjustments to existing capital and liquidity requirements, including:

• Loans subject to payment deferrals, such as mortgage loans, small business loans and retail loans will continue to be treated as performing loans. This temporary capital treatment will remain in place for the duration of the payment deferral, up to a maximum of 6 months. Additional reporting may be required in respect of these loans. OSFI has also published a direction on how loans extended through the newly-announced capital treatments made available to small and medium sized businesses by the federal government should be treated when taken on by DTIs. Specifically, the following measures apply:
  (1) Canada Emergency Business Account. These loans may be excluded from the risk-based capital and leverage ratios of DTIs;
  (2) New Export Development Canada loan guarantee for small and medium enterprises. The portion of these loans that is backed by the Government should be treated by DTIs as a sovereign exposure, while the remaining portion should be treated as a loan to the borrower. The entire amount of the loan is included in a DTI’s leverage ratio calculation; and
  (3) New Business Development Bank of Canada co-lending program for small and medium enterprises. The portion of the loan that a DTI holds in its risk-based capital and leverage ratios should be accounted for by DTIs.
• Transitional arrangements for expected credit loss provisioning available under the Basel Framework will be introduced, resulting in a portion of allowances that would otherwise be included in Tier 2 capital being included in Common Equity Tier 1 capital instead.
• The covered bond limit is temporarily increased to enable DTIs to pledge covered bonds as collateral to the Bank of Canada. Until now, total assets pledged by a DTI for covered bonds must not, at any time, represent more than 5.5% of the issuer’s on-balance sheet assets. Now, the total assets pledged for covered bonds must not exceed 10% of a DTI’s total assets, including instruments issued to the market and those pledged to the Bank of Canada, and the maximum amount of pool assets relating to market instruments is limited to 5.5%.
• DTIs are generally expected to hold operating buffers above the regulatory minimum leverage ratio. At this time, OSFI is encouraging institutions to use those operating buffers.
• DTIs must use the stock of unencumbered high quality liquid assets they hold within the Liquidity Coverage Ratio as a defense both against the potential onset of liquidity stress and during a period of liquidity stress. The Liquidity Coverage Ratio minimum standards have been adjusted by OSFI.
• Further guidance regarding the applicability of IFRS 9 during the COVID-19 period has been introduced in response to the significant increase in credit risk. The guidance touches on three specific aspects of the accounting for Expected Credit Losses:
  (1) Significant Increase in Credit Risk. DTIs should consider both quantitative and qualitative information, including experienced credit judgment, in assessing for significant increase in credit risk;
  (2) Forward-looking information. DTIs are encouraged to consider the exceptional circumstances, significant government support, the high degree of uncertainty and established long-term economic trends evidenced by past experience in determining reasonable and supportable forward-looking information;
  (3) Disclosure. DTIs are expected to provide sufficient and timely disclosures to allow users to understand assumptions and judgements made by management during the period to address the pandemic.
• The implementation of the Basel III report package is deferred. In particular, OSFI’s implementation date for the final set of Basel III reforms published by the BCBS in December 2017 is being delayed to Q1 2023. As well, OSFI’s implementation date of the revised Pillar 3 disclosure requirements finalized by the BCBS in December 2018 will be delayed until Q1 2023 at the earliest.
• The implementation of the Small and Medium Sized Banks Capital and Liquidity framework is deferred until the beginning of Q1 2023.

Measures for Insurers

OSFI has announced the following measures specifically for insurers:

• Where a deposit-taking institution approves a deferral of mortgage payments, and the borrower respects the payment deferral terms and conditions, such payment deferrals will not cause insured mortgages to be treated as delinquent or in arrears for purposes of determining regulatory capital requirements, so long as there is no claim outstanding on the mortgage loan. This capital treatment applies for the lesser of 6 months or the duration of the payment deferral. Additional reporting may be required in respect of these loans.
• The IFRS 17 semi-annual progress reporting is suspended until further notice.

Measures for Private Pension Plans

OSFI has announced the following measures:

• Portability transfers and annuity purchases relating to defined benefit provisions of pension plans are temporarily frozen. This freeze does not apply to defined contribution plans, pensions currently being paid from federally registered private pension plans, or buy-in annuities, amongst others. For further information on this measure, see the recent FAQ published by OSFI.
• Deadlines for certain actions and annual filings under the Pension Benefits Standards Act, 1985 and the Pooled Registered Pension Plans Act have also been extended.

Should you have any questions about any aspect of the measures above and what they mean for you, do not hesitate to contact the author.

The author would like to thank Alexandra David, articling student, for her contribution to this legal update.